Tuesday, February 6, 2007

it's tax season... and something is very wrong!

Consider this: In 2001, 397,000 people who applied for the Earned Income Tax Credit were audited, one out of every 47 returns. That’s a rate eight times higher than the rate for people earning $100,000 or more. Only one out of every 366 returns of wealthy households was audited. Over the previous 11 years, in fact, audit rates for the poor increased by a third, while the wealthiest enjoyed a 90 percent decline in IRS scrutiny. Of all the 744,000 tax returns audited by the IRS in 2002, more than half, David Cay Johnston finds, were filed by the working poor. More than half of IRS audits targeted people who account for less than 20 percent of taxpayers, the poorest 20 percent.

Now take at look at the 1998 tax return of President George W. Bush, when he was part-owner of the Texas Rangers baseball team. Never mind that he was also Governor of Texas at the time. He reported income of $18.4 million that year, $15 million of which was a capital gain from his Rangers’ stake when the team was sold. In fact, based on his investment, he was only entitled to a $2.2 million capital gain, but he was given a performance bonus for his work as a team executive. This was considered part of his capital gain and not counted as income, however, and so it was taxed at the then-20 percent rate for capital gains (now lowered to 15 percent) instead of at the then-top income tax rate of 39.6 percent. A perfectly legal sleight-of-hand that netted him an extra $3 million dollars in foregone taxes on top of the eight-figure gift conferred by his partners.

It doesn’t add up, does it? Spend $100 million a year of taxpayer money to audit the working poor, while actively foregoing billions in revenue from the wealthy who hide or defer their income as capital gains. But of course the government piles much, much more onto the rich man’s side of the scale: every year, as much as $70 billion is legally sheltered from taxation in off-shore trusts and other financial devices. Big accounting firms like Ernst & Young actually sell tax shelters for a good share of their own huge profits. One of their “products” costs $5 million and, in exchange, the client gets up to $20 million in tax obligations wiped out.

It’s stunning. All told, we have a “tax gap” - the difference between taxes owed and taxes paid - of more than $345 billion a year, more than nine times our entire homeland security budget. There’s an entire new cottage industry devoted to making tax obligations disappear. In other words, helping the rich get richer at the expense of those who have no choice but to pay their fair share - and mostly feel obligated to do so anyway. And make no mistake; every foregone dollar the rich owe is one you ultimately pay for in either higher taxes or fewer services down the road. When our tax code permits such public larceny, you know who writes the laws in this country.

And even those who break the law have less and less to fear: last summer the IRS quietly moved to eliminate the jobs of nearly half of its estate tax auditors, a move that one IRS lawyer described as a “backdoor way for the Bush administration to achieve what it cannot get from Congress, which is repeal of the estate tax.”